1. Understanding CSB/REDUX and TSP Presented by: Mike Leach CFP Financial Education Specialist Navy Family Service Centers of Hampton Roads

2. Retirement = Financial Independence!

3. Understanding CSB/REDUX and TSP Program will cover: Introduction Military Retirement System Retirement Plan Choice Thrift Savings Plan Retirement Planning Resources

4. Investment Income Retirement Benefits/ Pension Income Social Security Benefits Retirement Planning - The Three Legged Stool

5. Employer Sponsored Plans Defined Benefit Employer contributes Monthly pension; amount fixed - usually based on salary and years of service Examples: corporate or military pension Defined Contribution Employee Contributes (sometimes + employer) Lump sum pension amount varies - based on contributions plus return on investment Examples: 401(k), 403(b), etc.

6. Military Retirement Defined Benefit: Three systems in effect: Original / “Final Pay” Plan “High 3” Plan “CSB/REDUX” Plan (REDUX plus Career Service Bonus)

7. Military Retirement - “ Final Pay” Plan Those entering military before 8 September 1980 50% of final base pay at 20 years “Multiplier” rises at 2.5% per year of service - retirement at 75% final base pay after 30 years “COLA” increase each year based on rise in the government’s consumer price index (CPI)

8. Military Retirement - “Final Pay” Plan Years of Service% of Final Base Pay 2050.0 2152.5 2255.0 2357.5 2460.0 2562.5 2665.0 2767.5 2870.0 2972.5 3075.0

9. Military Retirement - “Final Pay” Plan Relatively Generous Package COLA feature important However, military retirement computation: –Does not include allowances –Does not include special duty or incentive pay –Does not include bonuses –Average military retiree (20 years) actually receives about 35% to 40% of final “salary” at retirement

10. Military Retirement - “High Three” Plan Those entering service from September 9, 1980, through July 31, 1986 50% of average highest three years of base pay at 20 years of service (increasing to 75% at 30) Full COLA each year Only difference: “High 3” vs. “Final Pay”

11. High 3 Plan Calculation Average base pay for highest 36 months Example: E7, retiring at 20 at end of 2000 18th year: $2300 x 12 mo (1998, E7@16) 19th year: $2449 x 12 mo (1999, E7@18) 20th year: $2566 x 6 mo (Jan 1, 2000, E7@18) $2588 x 6 mo (Jul 1, 2000, E7@18) Total : $88,913 / 36 months = $2470 - “high 3” average monthly base pay

12. High 3 Calculation (cont.) $2,470 - “High 3” average monthly base pay times multiplier for time in service (50%) equals: First year benefit - $1235 per month Second year benefit - $1278 per month (assuming 3.5% increase in CPI for 2001) Example above: Chief’s initial retired check (50% of final base pay) would have been $1294 “High three” represents moderate reduction in value of retired pay (generally 3% -11%)

13. Military Retirement - “REDUX” Plan Originally passed MMRA of 1986 Affected all those entering service on or after 1 August 1986 Retirement multiplier reduced to 40% of high three years base pay at 20 (vice 50%) Multiplier increases 3.5% per year (vice 2.5% - still receive 75% at 30) Annual pay raise based on CPI minus 1% per year (vice a full COLA)

14. Military Retirement - “REDUX” Plan Years of Service “High 3” Multiplier % “REDUX” Multiplier % 205040 2152.543.5 225547 2357.550.5 246054 2562.5 57.5 266561 2767.564.5 287068 2972.571.5 307575

15. High 3 vs REDUX Retirement early 2001 - Approximate initial retired check: High 3REDUX E6 @ 20$1020$ 860 E7 @ 20 $1235$ 988 E7 @ 22$1440$1230 E8 @ 24$1860$1670 E9 @ 30$2760$2760 04 @ 20$2260$1810 05 @ 24$3240$2920 06 @ 30$4790$4790

16. Military Retirement - “REDUX” Formula Remember two major changes in REDUX 1.Reduced multiplier (40% vice 50% at 20) 2.COLA 1% below inflation rate each year One time “catch up” at age 62 (to where retiree would have been under High 3) –Then COLA minus 1% continues - permanently –A significant reduction in retirement benefits (up to a 25% cut for those retiring at 20!)

17. Retirement Plan Choice All Service members who came on active duty on or after 1 August 1986 now get a choice: Option 1: Remain in “High-Three” Plan or Option 2: Elect “CSB/REDUX” Plan - Have retired pay calculated under the less generous REDUX formula and receive a one-time $30,000 Career Status Bonus at the 15 year point

18. CSB/REDUX Reduced retirement plus retention bonus - both are together in one “package” Must remain to at least 20 (or pay back a portion of the bonus) Bonus is taxable (for most members means they net $21,600 if they take all cash) Can shelter up to $10,500 in military Thrift Savings Plan; remaining $19,500 fully taxable (more on TSP later)

19. Retirement Plan Choice One time, irrevocable decision, to be made between the 14 1/2 and 15 year point “Both options have their own merits. Neither is universally better than the other. Which option is more advantageous can only be determined by each individual for his or her own unique circumstances and preferences.” - DOD Web site

20. CSB/REDUX Advantage of taking the Bonus: Immediate cash for - Investment- Rates of return may vary - Start a business- Very high risk - Education- May have other alternatives - Debt repayment- Less costly methods available - Consumer Purchase- Zero rate of return (the most unwise choice)

21. CSB/REDUX Disadvantages of taking the Bonus - Substantially reduces retirement benefit - Substantially reduces benefit for surviving spouse - Risk of Spending the bonus! “It’s not a bonus, it’s a loan!”

22. Retirement Plan Choice DOD Web Site: http://pay2000.dtic.mil/ Detailed information Sample case studies Personalized calculator

23. Comparing Options Harry and Richard –Their story is on the DOD web site –Identical twins both 1st Class Petty Officers with 15 years on active duty –Compares effect of High 3 vs. Redux plus bonus Chief Fastrack and Petty Officer Independence

24. Comparing Options Chief Fastrack: –15 years in, selected for promotion to E8 –Has bachelors degree/taking advanced courses –Outstanding service record –Plans to stay in the Navy as long a possible - family concurs with decision –Spouse has career with 401(k); family is financially stable, no consumer debt; both have IRAs and other investments Might Consider “CSB/REDUX”

25. Comparing Options Petty Officer Independence: –First Class PO, 15 years active duty; good record - hopes to make chief, but promotions are scarce in his rate –Plans to get out of the Navy at exactly 20 years and start a second career –Two children; spouse works part time –Few savings, no investments; main financial goal before retirement is paying off consumer debt and saving for first house; family needs a new car “High Three” Definitely Best Option

26. Retirement Plan Choice Review: a few considerations: One time, irrevocable decision If CSB/REDUX is chosen, bonus will be taxed Biggest difference in REDUX is not the 40% at 20 - it is the “Minus 1% COLA” feature CSB/REDUX looks better the longer you remain on active duty

27. Military Retirement Planning Questions ? (before moving on to TSP)

28. Employer Sponsored Plans Military will now offer both types: Defined Benefit: –High Three or CSB/REDUX Defined Contribution: –Thrift Savings Plan

29. Thrift Savings Plan Tentatively due to start 1 October 2001 Will be open to all service members* Deposit pre-tax dollars into tax deferred plan Up to 5% of base pay per month plus total amount of any special pays and bonuses (maximum $10,500/year) No government match (technically a savings plan, not a second retirement plan)

30. Thrift Savings Plan All money belongs to service member Upon separation or retirement can take cash (minus taxes), keep in TSP, transfer to new employer’s plan or own IRA Substantial penalties for withdrawing money prior to age 59 1/2 Some options for borrowing against plan while still on active duty

31. Thrift Savings Plan Three investment options –C Fund (common stock index fund) –F Fund (bond index fund) –G Fund (government securities fund) Two additional options planned –I fund (international stock index fund) –S fund (small cap stock index fund) Participant directed

32. Thrift Savings Plan Similar to Federal Civil Service TSP Some details still being worked out Great deal for all service members (even $50 per month @ 8% = $30,000 at 20) www.tsp.gov Questions ?

33. Retirement Planning - The Three Legged Stool Investment Income Retirement Benefits/ Pension Income Social Security Benefits

34. Social Security Remains an important part of retirement planning Military contribute while on active duty, and will be eligible for benefits Retirement age is increasing (67 vice 65) Benefits will be taxable in some circumstances Social Security Benefits Statement www.ssa.gov/retire

35. Personal Savings Personal savings and investments are the key “3rd leg” to the 3 legged stool Many options Roth IRA –Up to $2000 per year (each spouse) –No tax deduction; however, earnings are tax deferred and all withdrawals are tax free at retirement –Some options for early withdrawal (before 59 1/2) without penalty (in as little as 5 years)

36. Retirement Planning “Individuals or families that fail financially usually don’t plan to fail, they usually fail to plan!”

37. Retirement Planning Old retirement model: Brief period, generally of ill health (too old to work, too young to die) A few years (5-10) at most Generally with extended family Limited financial resources needed Goal: 60% - 75% of pre-retirement income

38. Retirement Planning New retirement model: Extended period (20-30 years), much of it in good health Starting earlier / living longer Independent living Extensive financial resources needed Goal - 100% of pre-retirement income (at least in first years of retirement)

39. Retirement Planning - Three Phases Active Phase 10-15 years in length May need 100% of pre- retirement income Passive Phase Health still good Life slows down Budget needs decrease Final Phase Medical and nursing care Budget needs increase

40. Retirement Planning Can be long and detailed … but Easy to get started Many resources American Saving Education Council (ASEC) www.asec.org “Ballpark Estimate”

41. ASEC Ballpark Estimate Easy-to-use form for initial retirement planning. Instructions for military personnel: Step 1: Annual income needed (The hardest part!) - Estimate how much annual income you will need at retirement. (Consider using 100% of pre-retirement income.) Step 2: Social Security - Multiply current monthly base pay x 12 for income for figuring Social Security.

42. ASEC Ballpark Estimate Step 2 (continued): Traditional Employer Pension - using current (“high three”) retirement pay chart, take monthly retirement pay for expected retirement pay grade x 12. (If you plan to select the “CSB/REDUX” retirement plan, reduce this amount by 10%, plus an additional 1% for each year short of 30 that you plan on retiring from the military.)

43. ASEC Ballpark Estimate Steps 3 through 6 - complete as directed Remember: This is only a rough estimate for initial planning

44. Retirement Planning Resources: NFSCs (TAMP, Financial Educators, & Retired Affairs Office) Navy Mutual Aid Commercial Financial Planners Commercial Web Sites

45. Retirement Planning Commercial: Stockbrokers, insurance agents, independent financial planners Commissions, fees, or a combination Professional designations (CFP) Check at least two - compare recommendations

46. Retirement Planning Commercial web sites - retirement planners Use caution, many do not accurately reflect inflation adjusted retirement pensions Use realistic assumptions Inflation: 3% to 4% (long term, 20+years) Long term rates of return: –9% to 10% maximum before retirement –7% to 8% maximum during retirement

47. Retirement Planning Disclaimer: The commercial web sites listed in this brief are provided for educational purposes only; no warranty is made regarding their accuracy or quality. This information does not constitute an endorsement of any site, or of any products or services that may be offered on those sites. Other sites with similar information are available, and may prove equally useful.

48. Selected Web Sites http://pay2000.dtic.mil www.ssa.gov (and www.ssa.gov/retire) Retirement Calculators: www.asec.org (“ballpark estimate”) www.smartmoney.com www.financialengines.com Retirement Education: www.vanguard.com www.morningstar.com www.aoa.dhhs.gov/retirement/fpfr.html

49. Military Retirement Planning Summary: Retirement foundation (3 legged stool) Military retirement - three plans (Final Pay, High-Three Plan, and CSB/REDUX) Thrift savings plan Retirement planning/resources Remember: It’s your future and your choices Questions/Comments?